Small Business Risk update: Q1 2017

Key insights from CreditorWatch's Small Business Risk Review have been released for the first quarter of 2017. The quarterly report is an analysis of aggregated and trade payment data to highlight risk for Australian businesses.

Graph 1 shows the average payment default (by dollar value) registered with CreditorWatch has had a small rise on the back of significant increases over the last five quarters.

Payment defaults often act as an early warning for all creditors. Struggling debtors are more likely to default on smaller, less critical suppliers before they default on larger creditors. As a result of this, CreditorWatch sees SMEs contributing payment default data up to six months before a larger creditor registers a default and/or commences legal action.

By comparing the graph below and table 1, we can see that the peak increase during Q3 2016 has translated into an increase in court actions, particularly in New South Wales and Victoria where the majority of court actions take place.

Table 1 shows reduced risk for Queensland businesses after consecutive drops in court actions have been reported for the last seven quarters.

There appears to be a sharp increase in large value court cases in New South Wales, as evidence by the gap between actions and dollar amount in Q4 2016 and Q1 2017. This result was likely influenced by the 206% increase of the average payment default in Q3 2016, as court actions have a higher chance of occurring within 6-12 months of a default being registered.

Like New South Wales, Victoria also experienced a sharp increase in court actions during Q4 2016 and Q1 2017, which has seen a growing negative trend from Q3 2015. Court actions still remain high in Western Australia though there has been a decrease in the dollar amount of court actions this quarter.

Cancelled unincorporated entities continue to rise

The number of unincorporated entities changing status from “active” to “cancelled” continues to soar with a 76% increase during the first quarter of 2017 (see Table 2 – Cancelled Unincorporated Entities). Unincorporated entities make up a siginifant portion of operating businesses in Australia which include enterprises such as sole traders, partnerships and trusts.

According to the Australian Bureau of Statistics1, business entry rates were highest for sole proprietors (18.6%) between June 2015 and June 2016. However, sole proprietors had the lowest survival rate (51.0%) over a four-year period from June 2012 to June 2016.

Colin Porter, Managing Director of CreditorWatch says “unincorporated entities are often overlooked in common statistics in comparison to incorporated entities (companies).

“The effects of a failing organisation can be felt regardless of the type of entity. As such, it’s important to get as much information across your entire ledger. Credit risk information is available on all entity types from companies, to sole traders, trusts and partnerships.”

CreditorWatch

CreditorWatch is a commercial credit reporting bureau with over 40,000 customers, from sole traders through to ASX listed companies. CreditorWatch provides credit risk information on any entity in Australia and assists creditors by monitoring and sending alerts for risk indicators that may affect a debtor’s repayment ability.